Tuesday, August 31, 2010

Moral hazard

So, South Canterbury Finance has gone into receivership, and the government has obligingly bailed out its investors to the tune of $1.7 billion. Each and every New Zealander has effectively just paid $340 - half a week's wages - to refill the pockets of 35,000 investors too stupid to understand that high interest equals high risk.

I think this displays perfectly the stupidity of including finance companies in the Retail Deposit Guarantee Scheme. Banks have customers, who are innocent victims in any collapse. Finance companies, OTOH, have investors, people who are effectively gambling. Guaranteeing them against losses is no different from guaranteeing the pokie zombies or TAB addicts - and just as pointless and reprehensible.

It also raises the question of what sorts of controls we have on the RDGS, and why companies like SCF were ever allowed to join it in the first place. Every insurance company in the world protects itself against the extremes of moral hazard - e.g. house and contents policies exclude owner-arson. I'd expect the RDGS to at least protect us from the financial equivalent. The fact that it apparently does not suggests extreme incompetence on the government's part, and something they should be held to account for.